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PERSPECTIVES

Insurers Focus on Solvency II Compliance

Insurers should focus on data, documentation and reporting as they move towards compliance with the Solvency II Directive on capital adequacy and risk management.

Insurers Focus on Solvency II Compliance

Contributed by Kamesh Rajaram, Partha Sarathi Panda

Insurers should focus on data, documentation and reporting as they move towards compliance with the Solvency II Directive on capital adequacy and risk management.

The Solvency II Directive provides a revised set of European Union (EU)-wide capital requirements and risk management standards insurers must meet by 2012. These stronger requirements on capital adequacy and risk management are designed to increase policyholder protection and reduce the possibility of consumer loss or market disruption in insurance.

Pillars of Compliance

Quantitative requirements dictating how much capital an insurer should hold are the first pillar of the directive. The second pillar establishes requirements for governance and risk management, as well as the effective supervision of insurers, while the third focuses on supervisory reporting and transparency.

This year, insurance firms are expected to step up their compliance efforts, focusing primarily on data and systems, reporting and ORSA (Own Risk and Solvency Assessment.) These compliance initiatives will be significant in scale, require the transformation of systems and processes at insurance firms, and cost the industry more than €4.5 billion.

Navigating the Compliance Journey

However, cloud-based testing poses different challenges than in-house testing.

To address enhanced quantitative requirements, the organization's Internal Solvency Model development process must come under review. Supervisory review and governance requirements will require greater attention, particularly around data and documentation work streams. Under the data work stream, the focus must be on effective data management, ensuring data quality, as well as integration and governance with a comprehensive data warehouse and architecture. Documentation work will involve creation of policies and governance systems to validate the functioning of the internal model, as well as maintenance of a central documentation register. Another key aspect will be enhanced reporting requirements, both to the supervisor and the public.

Most insurers say they will meet the 2012 deadline to implement Solvency II. However, the level of confidence decreases as insurers further analyze the impact of Solvency II, indicating the need for a more rigorous approach to dealing with possible contingencies.

While they await final guidelines, insurers should be using the existing guidelines and connecting the dots between the data and the reporting requirements as currently specified. They should complete their internal models and move toward implementation as well as technology planning and preparations to assure their Solvency II compliance.